Bad Behavior Leads to Poor Performance: Morningstar

Succumbing to short-term strategies related to performance chasing, investors often wind up failing to fully capture all of the benefits that markets can provide over time. 

At least, that's the warning issued by independent funds researchers at Morningstar Inc. In its latest "Mind the Gap" study, which was published in the second half of 2022, the Chicago-based investment analysis and research firm found:

• In terms of the average dollar invested in mutual funds and ETFs, investors overall earned 9.31% per year over the past 10 years (through 2021).
• Still, that was 1.73 percentage points less than the total returns produced by their funds (11.04%) on a dollar-weighted basis during this timeframe.

Of course, such a performance gap as measured by Morningstar varied by fund category. As illustrated in the chart below, investors in sector rotation and nontraditional equity funds — i.e., those using hedging and related market timing techniques — fared the worst. Also worth noting: Allocation funds, which are typically set to follow a disciplined glide path or long-term asset allocation strategy, did appreciably better.

A natural question raised by such a report is: Who should be blamed for these shortfalls? Well, it turns out the answer is fairly clear-cut. Morningstar's researchers traced such diminished results to poor investment behavior. As their Mind the Gap report states:

"This shortfall, or gap, stems from poorly timed purchases and sales of fund shares, which cost investors nearly one sixth the return they would have earned if they had simply bought and held."

The most recent findings are in line with performance gaps measured over the four previous rolling 10-year periods, adds Morningstar. Those gaps ranged from 1.6 to 1.8 percentage points per year, the report notes. 

As we've covered in the past, studies by Dalbar Inc. have consistently shown that most fund investors suffer lower returns by trying to time markets. The Morningstar study is another reminder that investors frequently let fear and other emotions guide the strategic investment process. Both independent funds research groups reach similar, yet separate, conclusions: The ill effects of taking a tactical — as opposed to strategic — view of portfolio management is more often than not going to result in degraded performance over time. 

Instead of trying to get too exotic and invite more risk-taking in your portfolio, we urge you to take a more practical and 'back to basics' approach to reaching your financial goals over a lifetime. Simply put, this comes down to investing in a globally diversified portfolio of index funds tilted to factors that leading academic research shows are key drivers of longer-term returns such as value, size and profitability. 

As part of devising a strategy to most effectively combat the harmful long-term impact of rising prices, we suggest that plan sponsors and investors feel free to start a conversation with Mary Brunson about taking a longer-term view of financial markets. Mary is the co-founder and vice president of Investing for Catholics. She is also an Accredited Investment Fiduciary (AIF). Feel free to email mary@ifa.com, or simply call: (888) 815-5025. 

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